Two years ago, the Los Angeles Clippers made national headlines not for their on-the-court performance but because of an audio recording of the team’s owner, Donald Sterling, making remarks deemed “deeply offensive” to minorities by the National Basketball Association. After the recording became public, NBA Commissioner Adam Silver suspended Sterling and threatened to cancel his franchise if he did not immediately sell the team. Subsequently, Sterling authorized his wife to negotiate a sale of the Clippers. In May 2014, Sterling’s wife accepted an offer from former Microsoft CEO Steve Ballmer to purchase the team for $2 billion.
But that was not the end of the matter. After initially agreeing to the Ballmer sale, Sterling changed his mind and refused to sign a binding term sheet committing him to the deal. The team itself was part of Sterling’s revocable living trust, where Sterling and his wife served as co-trustees, so his approval was necessary. Sterling’s wife responded by filing a lawsuit seeking to remove her husband as co-trustee, citing his lack of mental capacity.
The trust itself required “certification by two physicians who regularly determine capacity” before removing Sterling as trustee. A neurologist diagnosed Sterling with cognitive impairment secondary to primary dementia Alzheimer’s disease.” A second physician confirmed this diagnosis, adding Sterling was “at risk of making potentially serious errors of judgment, impulse control, and recall in the management of his finances and his trust.”
Based on this testimony, in July 2014 a California probate court removed Sterling as co-trustee—leaving his wife as the sole trustee—and confirmed the Clippers sale to Ballmer. The California Court of Appeal upheld this decision in a published November 16 opinion. Among other things, the Court of Appeal noted Sterling’s wife was acting in the best interests of the trust and its beneficiaries, which included Sterling, by selling the team. The appeals court noted Ballmer’s offer was $400 million higher than the “next best offer,” and the ongoing controversy surrounding Sterling’s ownership threatened to further devalue the team unless there was an immediate sale.
Nor did Sterling’s move to revoke the trust a month before the probate court’s decision affect the legitimacy of the sale. While a revocation terminates the trust, the appeals court said “the trustee continues to have the powers reasonably necessary under the circumstances to wind up the affairs of the trust.” In this case, that included the wife’s sale of the Clippers to Ballmer, which significantly raised the value of the trust’s assets. As the appeals court pointed out, “[Sterling’s] rule that a trustee cannot increase assets during the winding up process would lead to the absurd result that the trustee cannot seek the best possible result for beneficiaries, as he or she is required to do.”
Need Help With a Trust?
The Sterling case illustrates the role a trustee plays in managing trust assets. It also highlights the importance of trust provisions governing a trustee’s medical incapacity. If you are considering forming a trust and would like to speak with an experienced San Diego estate planning lawyer, contact the Law Office of Scott C. Soady today.